[yawen]

Can someone let me know why the last step using $35000-20000=$15000 instead of $25000-20000=$5000?

Lane, a single taxpayer, received $160,000 in salary, $15,000 in income from an S corporation in which Lane does not materially participate, and a $35,000 passive loss from a real estate rental activity in which Lane materially participated. Lane’s modified adjusted gross income was $165,000. What amount of the real estate rental activity loss was deductible?

Individuals may offset up to $25,000 ($50,000 if married filing jointly) of ordinary income with rental real estate activities. This deductible loss is reduced (but not below zero) by 50% of the amount by which the modified adjusted gross income of the taxpayer for the year exceeds $100,000.

Answer:

A.

$0

B.

$15,000

C.

$25,000

D.

$35,000

First, the passive activities were netted $15,000 from the S corporation – $35,000 from the rental = $(20,000).

Second, the salary of $160,000 is decreased by the net $20,000 passive activity loss for a modified AGI before limitation of $140,000.

Third, the amount of $140,000 that exceeds $100,000 is multiplied by 50%, equaling $20,000.

Fourth, the rental loss of $35,000 is decreased by the $20,000 limitation, leaving an allowable deduction of $15,000.

[Biff-1955-Tannen]

This through me off the other day as well, so I'll be interested in the responses. I was under the impression that the phaseout would reduce 25,000, and not the actual loss (35,000)

AUD 93 Jan 16
BEC 83 Feb 16
FAR 83 Apr 16
REG 84 May 16

99% Ninja MCQ only

[monikernc]

my question is why do we recalculate MAGI from what is given in the question?

i think your questions are answered with the total amount of loss is deductible but only up to $25,000 in this tax year. it is not “phased out” rather it is capped. i think the rest can be carried forward. am i wrong?

FAR 7/25/15 76!
AUD 10/30/15 93
BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
if you want things to change, you have to do something different

[Anonymous]

@moniker: you are right- they give us MAGI, no need to recalc.

yea thats a very confusing/convoluted explanation in the answer. this isnt a simple 25K/50K loss limitation thing, they are trying to throw separate activities at you as well to confuse you. but in explaining it away, the framers of the question confused themselves. here's a simpler way, and in essence waht they are testing, this question should take you no longer than 30 seconds on the exam once you get what they are asking.

MAGI = $160K > $150K = NO rental losses allowed! boom!
…but the question asks What amount of the real estate rental activity loss was deductible?
we CAN ALWAYS take rental losses upto the amount of Scorp passive income, always without phaseout its simple netting. therefore $15K of income = $15K of loss. thats it. done. answer choice B.

they are trying to confuse you with the 160K being close to the 150K phaseout and hoping you would net the 35K loss and get all convoluted(like they did in the explanation ha!) if AGI was $300K or $500K we would STILL be able to take only 15K upto the extent of the Scorp income. basically a horrible answer explanation…and now reading back im not sure mine is much better LOL, but im not going to erase it.

[monikernc]

thanks for checking in on us eesti. good luck with FAR and enjoy your vacation!

FAR 7/25/15 76!
AUD 10/30/15 93
BEC 2/27/16 82
REG 5/23/16 88!
Ninja Book and MCQ and the forum - all the way!!!
and a little thing i like to call, time and effort!
if you want things to change, you have to do something different

[Biff-1955-Tannen]

@eesti wow, that makes a lot more sense, thanks. The explanation they gave makes no sense and just confuses you into thinking they're asking about rental losses when it should have just said “Passive losses can only offset passive gains”

AUD 93 Jan 16
BEC 83 Feb 16
FAR 83 Apr 16
REG 84 May 16

99% Ninja MCQ only

[yawen]

@eesti, Thank you for the explanation!!

[Author]

Replies